Yo, check out their drip!

Franklin Templeton recently launched two ETFs that combine equity and crypto exposure by reinvesting stock dividends into bitcoin. The Franklin U.S. Equity Bitcoin DRIP Index (FBEQ) and U.S. Innovation Bitcoin DRIP Index (FIBT) ETFs both start with a 95% equity and 5% bitcoin allocation (DRIP stands for dividend reinvestment plan). The income distribution from the dividends is still taxed normally as income, and the funds rebalance quarterly to a 4.5% bitcoin allocation if the concentration has risen above 5% and automatically if it rises above 20%.

“We’ve been hearing from clients that they want to have a little bit of exposure to digital assets, but don’t want to manage it separately,” said Dina Ting, head of index investments at Franklin Templeton. “In one ETF, you get the exposure, but also a bit of self-discipline because the weight will move depending on the relative performances between the bitcoin and the underlying equity.”

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The argument for using these funds as opposed to separate equity and bitcoin ETFs is that it outsources the rebalancing in a more tax-efficient way. “The capital gain for the investors only happens when they actually sell the ETF that holds both the bitcoin as well as the equity,” Ting said. “But if they do it outside of their own account, every time they buy, every time they sell, they will incur potential capital gain.”

But investors may have a strong preference for buying separate funds, said Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence. The iShares Bitcoin Trust ETF (IBIT) “is so big now, it’s so ingrained into the minds of everybody,” he said. The Franklin funds are “a more efficient use of money, but I just don’t see this being a huge hit because I don’t think the problem that they’re solving is really a big problem.”

Plus, all-in-one ETFs tend not to be very popular, especially among advisors, he said. “I feel like advisors push towards using the individualized products to make them sort of seem like they’re useful,” he said. “A lot of it is just job security for them.”

Bit Con: Last week, suspected North Korean hackers made off with $6.3 billion of bitcoin from crypto exchange Binance, in what is thought to be the largest hack on record. And while the price of bitcoin slumped after the hack, trading below $80,000 on Friday, it’s actually a good argument for holding bitcoin within an ETF, Ting said. “Buying an ETF that gives you that exposure will reduce that risk of your own wallet getting stolen,” she said. “If you’re holding it as an ETF, you don’t have that risk, because your risk is going to shift to the ETF sponsor.”

State Street is not a one-way thoroughfare.

The company, State Street Investment Management, on Friday bolted on a mutual-fund share class to its $185 billion SPDR Portfolio S&P 500 ETF (SPYM). It appears to be the company’s first go at the dual-share-class structure since the Securities and Exchange Commission began granting exemptions for dozens of firms last December. And it’s among the first instances of an ETF getting a mutual-fund share class — nearly all other cases have been the other way around.

As to why … there are about 401 reasons. Getting an ETF-based strategy into 401(k) plans can mean serious distribution, even for a fund as big as SPYM, which coincidentally also recently won a major mandate as the default investment option in Trump Accounts. “This structure removes a longstanding vehicle constraint and represents an important step in our commitment to bring the benefits of ETF innovation to defined contribution savers,” State Street Chief Business Officer Anna Paglia said in an announcement.

SPY vs. SPYM vs. SPYMX

Things have been going well for SPYM this year, as cost-conscious investors have piled into the fund. It has taken in about $72 billion over the past year, per data from VettaFi. At two basis points, it’s a low-cost alternative to the company’s $814-billion flagship SPDR S&P 500 ETF Trust (SPY), though it doesn’t offer the same level of liquidity as the larger fund and is intended for longer holding periods rather than frequent trading.

“The vast majority of the hybrid share classes are probably going to be adding an ETF share class to a mutual fund because that is where the world is going,” said Daniel Sotiroff, associate director of manager research at Morningstar. For SPYM, whose mutual-fund share-class ticker is SPYMX, “the big thing is getting it in a 401(k) plan,” he said. Earlier this year, another firm, F/m Investments, became the first to launch a mutual fund share class of an existing ETF, and so far, few if any companies aside from State Street have done the same.

“Most of the industry’s enthusiasm has focused on offering ETF share classes of existing mutual funds,” James Veneruso, State Street’s head of DC product strategy for the Americas, wrote in a post in April. “But State Street Investment Management believes the real disruptor could be the reverse: offering mutual fund share classes of existing ETFs.” Mutual-fund share classes would easily plug into retirement plan record keepers’ systems but also offer the benefits of scale in some of the firms’ massive ETFs, he noted. “It would also unlock access to continued ETF innovation — such as strategies that blend public and private markets — bringing modern, diversified solutions into DC plans without [disrupting] existing infrastructure.”

Since the SEC began allowing dual share classes for companies beyond Vanguard, whose patent on the structure expired, only a handful have launched or prepped products. Some of the recent firms to do so include:

• BlackRock, which in September filed to add ETF share classes to five mutual funds collectively representing about $55 billion.
• Fidelity, which began adding ETF share classes in June and recently filed with the SEC for ETF share classes of its Dividend Growth Fund and Mega Cap Stock Fund.

A Question for Fiduciaries: Something State Street did not mention in its announcement is the fact that it has what would seem to be a competitor with SPYMX in its $1.7 billion S&P 500 Index Fund. That mutual fund has substantially higher fees, at 15.7 basis points, and an investment minimum that is typically $10,000. It’s unclear what advantage the S&P 500 Index Fund would have and whether plan fiduciaries will feel compelled to switch to SPYM, since it charges far less for exposure to the same stocks.